EBay: Back To Basics

BURLINGAME, Calif. -- When
John
Donahoe
John Donahoe
became chief executive of
eBay
in March 2008, he said it would take him a year to asses the company's portfolio and figure out its next move. Now a little over a year later, recent moves suggests that he's found his stride: getting eBay back to basics.

The online commerce giant is scheduled to report its first-quarter earnings on Wednesday. Analysts expect earnings to be $0.33 per share, according to Thomson Reuters, with a revenue consensus pegged at $1.94 billion. Compared to last year's figures, both numbers are roughly flat but nowhere near the kind of growth that the company once enjoyed.

Though
eBay's
auction business is idling, its management is not. Earlier this month eBay sold StumbleUpon, a social recommendation tool for Web content, back to company founders. The company then announced that it would spin off Internet telephony service Skype via an initial public offering in the first half of next year.

The portrait management is now portraying suggests a radically different eBay, a company today best-characterized as a hodgepodge of loosely-knit Internet properties and services. The new picture is without Skype, and according to analysts, it could be one without PayPal, too.

Analysts took the recent shedding of Skype and StumbleUpon as positive signs for growth, since both were widely perceived as awkward additions to the company's portfolio. But more than just boosting shareholder value, they say the asset sales should allow management to focus its most pressing tasks at hand--growing eBay's Marketplaces and PayPal divisions.

For now, eBay's online marketplaces are shrinking. Over the last year, growth rates swung from 19% in the first quarter to a negative 16% in the latest one. That's likely indicative of a maturing auction business, says Jeffries analyst Youssef Squali, but could also indicate that the 10-year-old online auction business is entering a permanent decline.

Squali estimates that eBay's gross merchandise volume--that is, the amount of goods passing through eBay's various marketplace platforms--shrunk by 22% in the last quarter. "That's not good," he says, and could mean further restructuring for eBay's portfolio of online properties.

"The harder it is for them to turn around the marketplaces business--in particular the auction business--the more likely they will look to re-capitalize the company by shedding non-performing assets and focusing on growth areas," notes Squali.

PayPal--the eBay-owned online payment platform--has become the second core business behind marketplaces. Revenues were up 25% to $2.4 billion in 2008, and the service now routes 9% of all global e-commerce. That growth makes PayPal a good target for a spinoff if management decides the company is worth more on its own than as part of eBay.

"If it becomes clear that more than half of the business is not doing anything and is in secular decline," Squali posits, "you could certainly see Donahoe and company looking to do something with the crown jewel."